I want to buy or sell some commercial real estate, how do I go about determining the value? Well, this topic is far to in-depth to discuss in one message, but let me give out a few tidbits.

Land - Well, if it is commercial land, we will assume you are going to develop it. While it is not as simple as it sounds, it is pretty much like this. Once you figure out what you want to build, what would the land be worth if you were buying land and building? Subtract the cost/value of the building and that is what the land is worth. Remember, it is not that simple. There are development costs and these can be substantial. If you are planning on being a landlord, you will have a period of time in which you must lease out the building, financing costs, leasing commissions, etc., and will have to work those numbers back to a present value. If the land is sloping or has stability issues, there are costs associated with that...and on it goes.

Apartment Building - These are much easier to work with. The number buyers and sellers throw around the most is the "Cap Rate". The cap (capitalization) rate is most appropriate where long term cash flows with little variance are involved. Apartment buildings fit that category. Value = Income/Cap Rate. Income means net income. This method also has numerous issues. What is an appropriate cap rate? Are the income and expense figures realistic and accurate? Generally, capital expenses and loan payments should be excluded from operating expenses. Has the owner maintained the building properly? If not, expenses will rise for a time period.

Now for a couple years in Edmonton, the market for apartment buildings was very hot and buyers were purchasing buildings left and right to convert into condominiums. During this time period, cap rates went very, very low. In reality, buyers were not even considering the cap rate; they were simply determining the market value of the individual condominium units, subtracting their costs (and profits) and buying the building if the numbers matched.

Land and Building - There are many variations to work with here and it gets complicated. Are you a User or and Investor? Sometimes buyers are users and investors. What type of building is it? What is the location? A building with a location that is likely to experience higher than normal capital appreciation is likely to sell for a higher price than a comparable building elsewhere.

Is it a multitenant building or a single-user building? Single user buildings can sit empty for a long time (especially in a market like this) and it is very difficult to value an empty building. The value of an empty building depends a lot upon how long a potential Investor buyer thinks it will take to find a user. Large, single user industrial buildings can sit empty for a long time. A multitenant building is safer and probably the best way to value it is to determine the present value of anticipated future cash flows.

What is the age and condition of the building? Building methods have taken a definite turn to the "green" and green buildings (google LEED certification) are quickly becoming in demand. Demand is waning for older, inefficient buildings.

In any commercial real estate purchase, redevelopment potential is sometimes a consideration. This involves a knowledge of what is planned for the area and what is happening. A good place to check this out in Edmonton is the City of Edmonton's web site www.edmonton.ca. This is easier said than done and is one area where we tend to become emotionally involved and sometimes see opportunities that aren't there.

Well, the topic as you can see, can be complex. Hopefully this post has given you some food for thought for your commercial real estate sale/purchase.